Beginning with a Zero-Leverage Company, as Debt Is Substituted for Equity

question 101

Multiple Choice

Beginning with a zero-leverage company, as debt is substituted for equity in the capital structure ________.

• A) the overall cost of capital first rises, reaches a maximum, and then declines
• B) the overall cost of capital declines
• C) the overall cost of capital first declines, reaches a minimum, and then rises
• D) the overall cost of capital rises

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Definitions:

Learned Helplessness

A condition in which a person suffers from a sense of powerlessness, arising from a traumatic event or persistent failure to succeed.

Certainty Effect

The tendency of people to overweight outcomes that are certain relative to outcomes which are only probable.

Incremental Theorist

An Incremental Theorist believes that personal qualities, such as intelligence and ability, can be developed over time through effort and perseverance.

Entity Theorist

An individual who believes that personal qualities such as intelligence or talent are fixed traits and not significantly changeable over time.